Banking union: The German way or no way

A deal on the planned single supervisor for banks in the eurozone will come about only if it meets German demands limiting the European Central Bank's (ECB) responsibility.

EU ambassadors in Brussels were set to meet Monday evening (10 December) for what diplomats said would most likely be an "all-nighter" in a last attempt to thrash out a compromise on the banking supervisor before a gathering of finance ministers on Wednesday dedicated to the topic.

At the core of the dispute is Germany's view that the ECB should not be made responsible for overseeing all 6,200 banks in the eurozone, as the EU commission, France and the ECB are advocating for, but rather for national supervisors to bear the responsibility for things going wrong in the smaller banks and for the ECB overseeing just the lager ones.

Non-eurozone countries have also raised concerns about voting rights and a level playing field between banks inside and outside the new supervision scheme. But according to an EU source, "if Germany agrees, others like Poland, will follow."

Initially, the idea of having a single supervisor came from no other than German Chancellor Angela Merkel.

Back in June, when Spain and Italy were struggling with sky-high borrowing costs and pressuring Merkel to agree for the eurozone bailout fund to be used for bank bailouts without governments having to pile on more debt, she agreed, but only if banks would first be put under the supervision of the ECB.

The existing European Banking Authority (EBA) - set up in the aftermath of the financial crisis and supposedly doing the same thing for banks in all 27 EU countries - proved to be inefficient, Merkel said, as it had failed to see the Spanish banking problems in time and gave them a clean bill of health in its so-called stress tests.

Yet the powers of the London-based EBA were watered down by member states, so that it cannot run its own audits to check whether what national supervisors are reporting, for instance about Spanish banks, is actually true.

That same debate seems to be doing the rounds this time.

The ECB should be fitted with real auditing powers, says Germany. But it also argues that no single supervisor can possibly be put in charge of 6,200 banks from Estonia to Portugal and from Ireland to Greece. Instead, national supervisors should still bear the responsibility for smaller ones, with only the large ones under direct ECB control.

A draft compromise prepared by the Cypriot EU presidency on Friday placed banks with assets worth more than €30 billion and doing cross-border activities under ECB supervision, all the rest staying under day-to-day national supervision. But the ultimate responsibility would still lie with the ECB.

German finance minister Wolfgang Schaeuble on Sunday indicated willingness to achieve a compromise "before Christmas" and to work on the actual setting up of the new body in 2013, but insisted for the ECB not to be made responsible for things it cannot oversee.

Spiegel magazine meanwhile reported that a compromise could also envisage placing the new supervisory body in Paris, to clearly underline the separation of activities within the Frankfurt-based ECB.

EU diplomats told this website the headquarters issue is the "least of our problems," even though Germany prefers for the supervisor to be "in the proximity" of the ECB in Frankfurt.

Germany's central bank chief Jens Weidmann - also based in Frankfurt - has meanwhile told Welt am Sonntag that the legal base finance ministers and the European Parliament are working on is not right and an EU treaty change would be the "legally clean solution" for the ECB to be entrusted with all these new powers.

EU treaty change means delaying the process for at least a few years.

The German government, however, maintains that the current legal base is fine and no treaty change is needed. But the bigger the ECB powers and the less democratic accountability the new set-up has, the more difficult it will be for the German parliament to approve the deal, Schaeuble has warned.